EUR/USD did manage to bounce up in perfect range trading, but this could also be a dead-cat bounce. The team at Citi lists two reasons to stay short:
Here is their view, courtesy of eFXnews:
The Trump victory has 1) led to a change in language at the ECB and 2) raised questions as to whether EUR is a risk-positive or defensive currency?
We remain bearish on EUR/USD after last Tuesday’s surprise.
First, ECB has softened their tone after the Trump victory. Concerns on the growth outlook for Europe as well as EU stability have limited a follow through in the “hawkish” rhetoric picked up last week. With December 8th’s ECB decision still to come – the market will trade in part off these perceived language changes.
Second, several of Euro’s anchors have been questioned after Trump’s victory. Eurozone stability, European trade and political relations are all longer-term drivers for Europe. They will change, possibly undermining investor confidence in the macro outlook for 2017/2018. Political risk for Europe is certainly going to rise into 2017 with the Italian Referendum, the Dutch, German and French elections. This tends to be negative for European equity markets, limiting cross border investment. And unlike the US, political surprises are unlikely to bring fiscal stimulus.
The short-run for EUR is dominated by rate differentials, the medium-run by a deteriorating trade outlook and the long-run by tail risk – both of these end up being EURUSD negative.
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We expect an orderly move lower, testing the lower bound of the QE range and below but not a precipitous drop sharply lower. Generally the FX rate over the medium-term is driven by the cumulative current account, FDI and portfolio flow for a country. These three buckets account for 95% of the cross-border order flow. We expect the fiscal impulse from the US to become a magnet for both FDI and portfolio flows, and see little likelihood of it being matched by Europe. However, at the same time the ECB will likely undergo a tapering of its bond purchases over 2017 – leading to less investor displacement – and less EUR negative outflows monthly. The flows on net-remain negative, but the attraction to a foreign market has to be measured by the increasing options domestically. Hence, we are left with a weaker EUR, but orderly weakness.
CitiFX added a short EUR/USD to its technical portfolio from 1.09 last week.
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